This Week’s Market Buzz

In February, Tennessee truck-stop conglomerate Pilot Flying J bought Utah's Western Petroleum, one of the largest private companies in the country that supply fuel to drilling rigs serving the hydraulic fracturing market. Late last month, the company bought Maxum Petroleum, a fuel provider based in Connecticut.
“They are the number-one supplier to drilling and fracking operations in this country,” Outgoing Pilot President Jimmy Haslam told the Cleveland Plain Dealer. Both companies have the bulk of their workers in Texas, North Dakota and Pennsylvania. A smart guy like Jimmy Haslam in banking on the future vitality of the hydraulic fracturing market. That sends a clear message.

Minneapolis Star Tribune reporter Adam Belz reported on the re-emergence of the railroad infrastructure in Wisconsin. Canadian National Railway is spending $35 million to rebuild railroad tracks in the area, all because of frac sand. “Voracious demand for the hard, round sand of Wisconsin and Minnesota has abruptly reversed a decades-long decline in the region's railroads,” Belz wrote. “Hydraulic fracturing has created a major new business for railroads, because each horizontal well requires between 3,000 and 10,000 tons of sand. The demand – about 60 new sand mines are in the works in Wisconsin – is reviving sleepy trade routes. Railroads are striking deals with a spate of new sand processing plants, bringing dormant rail lines back into service, upgrading tracks and building rail yards and loading facilities across the Upper Midwest.” All the major railroads are expanding across the region to accommodate sand in one way or another. In two years, Union Pacific recorded a 265 percent increase in frac sand shipments.

The buzz among some people analyzing the frac sand market is that the industry is about to become over-supplied. “An oversupplied commodity will price to a level that reduces supply enough to balance the market by forcing producers out of business. While we have not come across a frac sand project with cash operating costs north of $35 per ton, we consider that to be a reasonable base-case level for where pricing will return to in the coming quarters. This would represent a decline of more than 50 percent from current levels,” said one analyst. Others say “hogwash.” While existing and new competitors have announced supply expansions and greenfield projects, the magnitude of these expansions is not expected to meet expected demand because of the:

Difficulty of securing contiguous frac sand reserves large enough to justify the capital investment required to develop a processing facility.

Challenges of identifying reserves with the above characteristics that either are located in close proximity to oil and natural gas reservoirs or have rail access needed for low-cost transportation to major shale basins.

Hurdles of securing mining, production, water, air, refuse and other federal, state and local operating permits from the proper authorities.

Local opposition to development of facilities, especially those that require the use of on-road transportation, including moratoria on raw frac sand facilities in multiple counties in Wisconsin which hold potential sand reserves.

Long lead time required to design and construct sand-processing facilities that can efficiently process large quantities of high quality frac sand.